Bankia, Catalonia pile on Spanish debt worries

Source: Reuters - Sat 26th May 2012

Financial troubles at a big Spanish bank and one of the country's richest regions, Catalonia, piled on problems on Friday for the Madrid government and for investors who question whether it can pay its debts without help from euro zone allies.

Meanwhile, the president of Catalonia, one of the wealthiest of Spain's 17 regions, said high interest rates demanded by wary creditors were making it hard for his administration in Barcelona to raise funds.

He called on the central government in Madrid to guarantee joint bonds issued by regional authorities or otherwise underwrite regional financing.

"We don't care how they do it," Artur Mas told reporters, saying the Spanish economy would not grow if the regions struggle to pay monthly bills to suppliers.

Investors believe the banks' capital shortfall and a credit crunch for regional governments could force the euro zone's 4thlargest economy to seek international aid - a move that would throw further doubt on the future of the currency union.

Adding to a miserable day for Spanish investors, Standard & Poor's lowered its ratings on the debt of Bankia and four other banks and said it was taking a dimmer view of Spain's economy:

"Spain is entering a double-dip recession that will likely trigger a large increase in the volume of problematic assets that the financial system will accumulate in 2012 and 2013, which in turn will lead banks record high credit provisions," the ratings agency said in its report on the banks.

BANKIA NEEDS RISE

After Bankia's new management team analyzed the financial position of the bank at a board meeting, the lender asked for 19 billion in state rescue money.

Earlier this week, Economy Minister Luis de Guindos, who once pledged that no public money would be used to bail out banks, told a congressional committee the state would have to put at least 9 billion euros into Bankia.

The government has already spent 4.5 billion euros to prop up Bankia, bringing the state bill up to 23.5 billion euros.

Bankia also restated its 2011 accounts on Friday to give a 3 billion euro loss compared to a previously reported profit, as it dramatically wrote down bad loans, holdings in Spanish blue-chips, and repossessed property.

One London-based analyst said the government's handling of Bankia had undermined confidence in whether the figure announced would cover losses. "Whatever they say, people are going to think it's not enough," said the analyst, who spoke on condition of anonymity.

"The process has been going on for so long."

Spain is nationalizing the bank, which holds some 10% of the country's total deposits, after it was unable to handle heavy losses from the property bubble that burst in 2008.

The government insists that Bankia's woes do not reflect the wider financial system in Spain.

Spain will have to go to the markets to raise debt to put into Bankia at a time when its borrowing costs are high.

CATALONIA WOES

Catalonian leader Mas's comment helped to drive the euro currency to a 22-month low. Spain's country risk, as measured by the spread between German and Spanish bonds jumped to 496 basis points from around 460.

Treasury Minister Cristobal Montoro has pledged to come up with a way to back regional debt by July. On Friday, Deputy Prime Minister Soraya Saenz de Santamaria said the central government was still looking at options.

The regions have 36 billion of debt maturing this year and have been priced out of international bond markets. Catalonia's debt rating has been cut by S&P credit rating agency to one notch above junk.

Mas said Catalonia's options for refinancing were central government bonds or debt guarantees, high-priced short-term bank debt or the limited market for selling patriot bonds to Catalonian residents.

ADDITIONAL SPENDING

While struggling to put a precise number on a banking sector clean-up, Spain has also revised up its 2011 deficit figure several times as additional spending from regional and local governments has come to light.

The conservative government of PM Mariano Rajoy plans more than 45 billion euros in savings this year to try to bring the deficit down to 5.3% of GDP, a mission many say is impossible.

Spain has gone through four different stages of rescues of its banks, none of which has completely convinced investors that the clean-up has been deep enough.

Now it may end up creating one nationalized bank out of its failed lenders, including Bankia, if the state cannot find buyers for state-rescued banks like mid-sized Catalunya Caixa.

Two sources close to the situation said that the FROB bank restructuring fund, which has taken over several banks to resell them, was considering delaying the auction of Catalunya Caixa and smaller savings bank Banco de Valencia.

Under pressure from the EU, the government has hired independent auditors to produce a report on the financial system. International institutions such as the ECB and IMF will scrutinize the audit to give it credibility.